Glossary
Caps & Limits
Percentage Cap
A cap written as a fixed annual percentage increase, commonly 3% to 5%. The same stated percentage can produce different dollar ceilings depending on whether the lease compounds it year over year or applies it as simple, linear growth.
Firm impact
Firms should confirm the compounding method before trusting a cap ceiling. Over a ten-year lease, a compounded 5% cap produces a noticeably higher ceiling than a linear 5% cap, even though both leases say '5%.'
How this gets abused
A lease intends simple growth: 5% of the base year added each year. The landlord instead compounds the 5% year over year, producing a ceiling thousands of dollars higher by year ten than the lease's plain-language math supports.
Practitioner note
Request the landlord's cap worksheet and check whether it multiplies (compounds) or adds (linear) the percentage each year. Language that just says 'increases capped at 5% per year' usually means simple, linear growth unless the lease specifically says 'compounded.'
Related terms
FAQ
Questions about percentage cap
Does a percentage cap always compound?
No. Many leases intend simple, linear growth off the base year unless the lease specifically says the cap compounds. Read the clause closely rather than assuming either method.
What's the practical dollar difference between compounded and linear caps?
It grows every year and can add up to a meaningful gap by year ten of a lease. The exact amount depends on the base year figure and the cap rate, so run both calculations before flagging a finding.
You know the term. Now check the math.
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